This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, click the "Reprints" link at the bottom of any article.

June 17, 2013

Investors Remain Bullish on Turkey Despite Political Unrest

The recent wave of anti-government protests in Turkey continues to gain steam showing as little sign of abating as the country’s prime minister, Recep Tayyip Erdogan, shows of backing down. Yet foreign investors for whom Turkey has been a favored investment destination for some time are not particularly perturbed by the demonstrations. Not for the time being, anyway.

“The protests have changed our view in the sense that we think the intermediate term will be more challenging for Turkey,” said David Ruff, lead manager of the Forward International Dividend Fund and Forward EM Select Dividend Fund, “and the recent set of events have reminded investors of the political intrigue in the country and the risk that that can present, so of course, the increased risk premium will make it more difficult for equities to continue on the same trajectory.”

However, the Forward Funds have a larger allocation to Turkey than their underlying indices, and for the time being, Ruff doesn’t believe any need to change that position. Many Turkish companies, he said, have a good track record of passing over cash earnings in the form of a dividend payment, and this makes them attractive investment opportunities. On a more general level, the economic weakness in peripheral Europe has helped Turkish companies a great deal in that “consumers have moved down the price point spectrum for various durable goods from refrigerators to cars,” and Turkey has also been the beneficiary of investment that were it not for Europe’s economic troubles and the political uncertainty in the Middle East, would have headed to those destinations instead.

The strength of the Turkish corporate sector has been extremely appealing to foreign investors, said Richard Segal, head of emerging markets strategy at Jefferies in London. Many conglomerates are very well run, they have begun to expand abroad and their performance has stood out relative to the performance of companies in their sectors in other European countries.

On the macro side, fiscal policy in Turkey has been very sound over the past decade and economic reforms, particularly on the micro side, have been quite compelling and enhanced Turkey’s appeal in international markets.

But this, Segal said, has contributed to giving investors a false sense of security that everything was fine in Turkey, not least because Erdogan’s Islamic party has been very pro-business.

“In reality, there has been a great deal of discontent bubbling underneath for a long time, particularly with respect to foreign policy on issues such as the Kurdish negotiations and of course, Syria,” Segal said.

And Turkey has had a few problems that have until now been largely ignored by foreign investors. The country has development ambitions that are commendable, in particular with respect to infrastructure, but there is no money to really finance those initiatives, Segal said, so there has been a lot of overseas borrowing.

“Either they won’t be able to borrow so much and will have to scale back development ambitions, which means growth will be lower, or alternatively, Turkey will still be able to borrow that much and growth will be higher, but they won’t be able to borrow to pay of debt,” he said. “I doubt they will be able to borrow that much, which means growth will be less, but that wouldn’t be such a bad thing.”

Since the protests began, the Turkish stock market has been blowing off steam, but many investors, Ruff included, do concede that it had got ahead of itself and needed to deflate. All the same, certain names continue to have a good run, including Turk Traktor, the country’s premier manufacturer of tractors and one of the Forward Funds’ main Turkish holdings.

“Although it got pounded with the rest of the Turkish names, Turk Traktor bounced back significantly and is higher than it was a week ago, which is rare,” Ruff said. Still, there’s no denying that the political insecurity that has now come to the fore in Turkey could have implications for the future. While Ruff believes it’s still too early to talk of a Turkish spring, such an eventuality would ultimately only prove beneficial both to Turkey and to those who invest in the country, since “what we’re seeing there right now has reawakened the movement for Turkey to become a more secular, more modern and more democratic nation,” he said.